Knowee
Questions
Features
Study Tools

The common stock of Eddie's Engines, Incorporated, sells for $27.51 a share. The stock is expected to pay a dividend of $2.40 per share next year. Eddie's has established a pattern of increasing their dividends by 4.5 percent annually and expects to continue doing so. What is the market rate of return on this stock?

Question

The common stock of Eddie's Engines, Incorporated, sells for 27.51ashare.Thestockisexpectedtopayadividendof27.51 a share. The stock is expected to pay a dividend of 2.40 per share next year. Eddie's has established a pattern of increasing their dividends by 4.5 percent annually and expects to continue doing so. What is the market rate of return on this stock?

🧐 Not the exact question you are looking for?Go ask a question

Solution

To calculate the market rate of return on this stock, we can use the Gordon Growth Model (also known as the Dividend Discount Model). This model is used to determine the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. Given a dividend per share that is expected in one year, and a growth rate for the dividend, the model solves for the present value of the infinite series of future dividends.

The formula for the Gordon Growth Model is:

R = (D1 / P) + g

Where: R = required rate of return D1 = dividends per share expected in one year P = price per share g = growth rate of dividends

In this case: D1 = 2.40P=2.40 P = 27.51 g = 4.5% = 0.045

Substituting these values into the formula, we get:

R = (2.40/2.40 / 27.51) + 0.045

First, divide 2.40by2.40 by 27.51 to get approximately 0.0872.

Then, add 0.045 to 0.0872 to get 0.1322.

So, the market rate of return on this stock is approximately 13.22%.

This problem has been solved

Similar Questions

The Co. just paid a dividend of $1 per share. Analysts expect its dividend to grow at 25 percent per year for the next three years and then 5 percent per year thereafter. If the required rate of return on the stock is 18 percent, what is the current value of the stock?

Richard, Inc., will pay a quarterly dividend per share of $1.15 at the end of each of the next 12 quarters. Thereafter, the dividend will grow at a quarterly rate of 1.7 percent forever. The appropriate rate of return on the stock is 12 percent, compounded quarterly. What is the current stock price?

The Bell Weather Company is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 18 percent a year for the next 4 years and then decreasing the growth rate to 3 percent per year. The company just paid its annual dividend in the amount of $1.80 per share. What is the current value of one share of this stock if the required rate of return is 7.30 percent?Multiple Choice$83.59$63.06$72.25$85.39$74.05

An issue of common stock currently sells for $40.00 per share, has an expected dividend to be paid at the end of the year of $2.00 per share, and has an expected growth rate to infinity of 5% per year. The expected rate of return on this security is A. 5%. B. 10.25%. C. 13.11%. D. 10%.

Kiffer SARL just paid a dividend of €0.85 on its stock.They expect dividends to grow at a rate of 8% in the next three years and 5% per year thereafter.Given a required rate of return of 15%, what is the current value of the company's common stock?€8.28€9.64€10.41€11.24€12.41

1/3

Upgrade your grade with Knowee

Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.